Financial Derivatives use in Top Corporate Entities in India – A Trend Analysis

International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395-0056
Volume: 04 Issue: 08 | Aug -2017 www.irjet.net p-ISSN: 2395-0072
© 2017, IRJET | Impact Factor value: 5.181 | ISO 9001:2008 Certified Journal | Page 276
FINANCIAL DERIVATIVES USE IN TOP CORPORATE ENTITIES IN INDIA –
A TREND ANALYSIS
Dr Suprava Sahu
Assistant Professor, P.G. Department of Commerce, Ravenshaw University, Cuttack
---------------------------------------------------------------------***----------------------------------------------------------------------
Abstract - Risk is one of the essential elements of
modern business and economic variable and maintains a
positive correlation with profitability and performance. In
the proposed work, it has been planned to search the
answer to some important questions like attitude of
commercial entities to use derivative advantageously as
one of the effective alternative for risk management and
the scope of these derivatives instruments in this regard.
The study shows that there is a significant increase in the
propensity to use financial derivatives in regard to top
performing companies of India.
Key Words: Derivative, Risk Management, Indian
Companies, Index
REVIEW OF LITERATURE:
Researchers during the past two decades have
endeavoured to explore the purpose of risk
management.
Fok et al. (1997)1 have reported that although the
primary purpose of hedging is to reduce earnings
volatility, it may also increase firm value. Their study
shows that hedging reduces the probability of financial
distress, the agency costs of debt, and the costs of equity.
In addition, they suggested that corporate ownership
structure might affect the desirability of hedging. They
also found that large firms had a stronger tendency to
hedge, firms with a larger percentage of value derived
from growth opportunities were more likely to hedge,
and convertible debt served as a substitute for corporate
hedging.
Joseph (2000)2 has studied the relationship between
the use of hedging techniques and the characteristics of
UK multinational enterprises. The study indicates that
firms are not very receptive to the newer and more
complex types of derivatives.
1
Fok, C., Carolyn, C., and Ming, C. (1997). Determinants of
Corporate Hedging and Derivatives: A Revisit, Journal of
Economics and Business, 49, 569-585.
2
Joseph Mariathasan, (2000),"The use of derivatives by
insurance companies", Balance Sheet, Vol. 8 Iss 1 pp. 29 –
32.Permanent link to this document:
http://dx.doi.org/10.1108/09657960010338454
Oosterhof (2001) has suggested that corporate risk
management and hedging are important activities within
financial as well as non-financial corporations.
The study concluded that the major determinant of
derivatives’ use is firm size. The mixed results indicate
that corporate risk managers, willingly or unwillingly, do
not behave in an optimal way. Fatemi and Luft (2002)
established that risk management strategies should be
pursued to enhance shareholder value. The empirical
evidence cited was supportive of the notion that the
strongest motive for risk management behavior was the
avoidance of financial distress.
Belk (2002) studied the organization of foreign
exchange risk management among the multinational
corporations in the UK, the US and Germany. He
concluded that companies were generally risk-averse
and the goals of currency risk management were not
clearly formulated.
Bodnar et al. (2003)3 examined the influence of
institutional differences on corporate risk management
practices in the US and the Netherlands. Their study
shows that institutional differences appear to have an
important impact on risk management practices and
derivatives use across US firms and Dutch firms.
Pramborg (2005)4 compared the hedging practices of
Swedish and Korean non-financial firms. The findings
suggested that the objective of hedging differed among
firms in the two countries. Korean firms mostly focused
on reducing fluctuations in cash flows, while Swedish
firms more commonly emphasized reducing fluctuations
of accounting numbers. Saito and Schiozer (2005)
presented evidence on derivatives usage by Brazilian
non-financial firms, using a sample of 74 companies.
3
Bodnar, Gordon M. and de Jong, Abe and Macrae, Victor,
The Impact of Institutional Differences on Derivatives
Usage: A Comparative Study of US and Dutch Firms.
European Financial Management, Vol. 9, pp. 271-297,
September 2003. Available at SSRN:
http://ssrn.com/abstract=423630
4
Pramborg (2005); Foreign exchange risk management by
Swedish and Korean nonfinancial firms: A comparative
survey; Pacific-Basin Finance Journal, Volume 13, Issue 3,
Pages 343-366

RESEARCH GAP:
The review observes a serious gap in the area of risk
management practices by use of derivative practices of
Indian firms, hence calls for further research in the area.
Liberalization and globalization of the Indian economy
resulting in industrial growth, liberalization of trade
regulations and emergence of new risk management
techniques in corporate finance have provided new
opportunities for managing risks. An empirical research
is expected to provide insight into the practices and
behaviour of the corporate enterprises in India. The
study related to the risk management practices assumes
greater significance now than ever before, because of
various global phenomenon during the preceding one
decade when not only India but the whole world has
undergone substantial and first changing volatilities in
every sphere including economic, social, regional,
security and political issues.
The literature survey confirms that the existing studies
in the area of risk management practices have not
covered important aspects like “Risks(Concerns) and
side effects of the use of risk management tools such as
financial derivatives in India and an exploratory and
comparative analysis of the approach and attitude of risk
management through derivatives between public (Govt.)
and private Indian Inc. Another important aspect
proposed to be covered is the cost benefit analysis of the
use of derivatives.”
STATEMENT OF PROBLEM
The main research problems for the study are:
1. What is the degree and extent of use of
derivatives by Indian companies for risk
management purposes?
RESEARCH OBJECTIVES
The main objective of the study is to explore facts in the
following regards:
1. Which derivatives are used, and which type of
exposure they are used for?;
2. Degree and extent of use of financial derivatives;
3. Factors of concern in derivatives usage
RESEARCH HYPOTHESIS:
The following Hypothesis are framed after careful study
of the related literature:
H01: There is a significant increase in use of financial
derivatives for risk management purpose by Indian
corporates.
SIGNIFICANCE OF THE STUDY:
The available literature consists of examples of
corporate practices of firms from western countries in
relation to risk management using various engineered
instruments (Derivatives). There is not much study of
the overall approach and strategy of risk management
that is being implemented by the managers of the firms
in India through derivatives. On this back drop, it has
been planned to give a sincere effort to unearth and
divulge new facts on various and diversified aspects of
use of derivatives as stated in the research objectives.
RESEARCH METHODOLOGY:
Though the topic has become popular now-a-days, still
there are many areas which have remained uncovered in
the Indian context and requires further investigations
e.g.Indian corporate hedging pattern through risk
management, concerns and side effects of risk
management through derivatives, risk management
through exotic derivatives, difference in perception risk
and their square up by suitable hedging through
appropriate derivative instruments of public(Govt) and
private sector companies. Therefore, to explore new
vistas in the field of use of derivatives, a descriptive and
exploratory study is undertaken on 100 small and large
companies including companies taken from SENSEX-30
or NIFTY-50 indices for consideration.
 SOURCES ANDMETHODSOFDATACOLLECTION
Primarily, secondary data is used for the research work.
Secondary data are collected from annual reports,
articles of financial research journals, reference books on
derivatives, business magazines, daily business/
financial newspapers, internet etc.
 STATISTICAL TOOL:
The study has been conducted over a period of 5 years,
i.e from the year 2011 to 2015. Data has been collected
from various sources will be analysed with the help of
statistical software like SPSS, EXCEL SPREAD SHEETS etc
.and statistical tools. Tables, charts, and graphs have
been used to present the required data. Statistical tools
like percentage, average, standard deviation, t-test, chi-
square test, ANOVA are used for analysis of data.
DATA ANALYSIS:
It has been tried to decipher the trend of derivative use
in Indian context starting with the analysing the
previous literature analysis and followed by
classification of companies into various industries and

thereafter analysing classified industry data to get an
insight into the pattern of derivative in different major
sectors of the economy.
Table-1
Empirical Evidence of Use of Derivatives
Study
Countr
y
Yea
r
Sa
mpl
e
Size
No. of
Resp
onses
Resp
onse
Rate
% of
User
s
Block and
Gallagher
USA
198
6
500 193
38.6
%
20
Dolde USA
199
3
500 244 48.8 85
Bodner et
al
USA
199
4
200
0
530 26.5 35
Bodner et
al
USA
199
5
200
0
350 17.5 41
Bodner et
al
USA
199
8
192
8
339 20.7 50
Phillips USA
199
5
348
0
657 18.9 63.2
Grant and
Marshall
UK
199
5
500 146 29.2 90.2
Alkebach
andHageli
n
Sweden
199
6
213 163 76.5 51.5
Jalilvand
et al
Canada
199
6
548 154 28.1 75
Berkman
et al
New
Zealand
199
7
124 79 63.7 53.1
Bodnar
and
Gebhardt
German
y
199
7
368 126 34.2 77.8
Khim and
Liang
Singapo
re
199
7
100
0
260 26.0 35.4
Fatemi
and
Glaum
German
y
199
8
153 71 46.4 88
Ceuster
et al
Belgium
199
7
334 73 21.9 65
Lee et al
UK, US,
Asia-
Pacific
199
8
600 179 39.5
29.8
3
Benson
and
Oliver
Australi
a
200
0
429 100 23.3 76
Mallin et
al.
UK
200
1
800 495 63.59 62.1
El-Masry UK
200
3
401 173 43.14 67
Anand
and
Kaushik
India
200
8
640 55 8.6 83.6
Paligorov
a and
Staskow
Canada
201
4
152
2
N.A N.A 33
Present
Study
India
201
5
433 N.A N.A
68.5
3
Table-2
Global Usage of Derivatives
Country % of Users
United Kingdom 92.70
Germany 88.00
Australia 76.00
Canada 75.00
Belgium 65.80
India 61.20
New Zealand 53.00
United States of America 50.00
Table-3
Industry Classification of Sampled Firms on the basis
of year 2014-15
Sector
No. of
Firms
% of
Sample
No. of
Users
% of
Users
Automobiles &
Auto Components
31 7.16* 22 70.97#
Conglomerate 13 3.00 10 76.92
Consumer
Durables
17 3.93 13 76.47
Energy, Power &
Equipment
44 10.16 27 61.36
Fast Moving
Consumer Goods
46 10.62 33 71.74
Fertilizers &
Agricultural
Chemicals
15 3.46 10 66.67
Health,
Pharmaceuticals &
Biotechnology
25 5.77 14 56.00
Industrials &
Engineering
69 15.94 41 59.42
Information
Technology
26 6.00 20 76.92
Infra, Real Estate&
Construction
Materials
53 12.24 23 43.40
Leisure and
Entertainment
11 2.54 6 54.55
Metals & Mining 23 5.31 13 56.52
Telecom Services 9 2.08 5 55.56
Textiles, Apparels
& Jewelleries
33 7.62 23 69.70
Transport Services 18 4.16 5 27.78
Sample 433 100 265 61.20
The above table shows the classified industry analysis
with regard to degree and pattern of derivative use and
it is very evident from the table that information
technology, conglomerate and consumer durables are
the sectors which are the industry leaders in terms of
proportion of derivative users in the sampled companies
belonging to that sector. Similarly, transport sector is the
least user of derivative instruments for risk management
purpose.

Table-4
Proportion of Use of Derivatives—by Size
Sales Group*
Number
(% of Total)
Users
(% of
Number)
Non-
users
(% of
Number)
More than ₹500 billion
22
(5.08 %)
19
(86.36
%)
3
(13.64
%)
₹400 - ₹500 billion
4
(0.92 %)
3
(75.00
%)
1
(25.00
%)
₹300 - ₹400 billion
12
(2.77 %)
9
(58.33
%)
3
(41.67
%)
₹200 - ₹300 billion
14
(3.23 %)
10
(71.43
%)
4
(28.57
%)
₹100 - ₹200 billion
41
(9.47 %)
28
(68.29
%)
13
(31.71
%)
₹50 - ₹100 billion
76
(17.55 %)
51
(67.11
%)
25
((32.89
%)
₹40- ₹50 billion
32
(7.39 %)
23
(71.88
%)
9
(28.12
%)
52
(12.01 %)
30
(57.69
%)
22
(42.31
%)
98
(22.63 %)
55
(56.12
%)
43
(43.88
%)
74
(17.09 %)
36
(48.65
%)
38
(51.35
%)
Less than ₹10 billion
8
(1.85 %)
1
(12.5 %)
7
(87.50
%)
*Grouping has been made on the basis of sales of the
year 2014-15
The findings on the basis of classifying the companies
into different classes of size in terms of the sales revenue
of the period 2015-16, it is very clear that the large sized
companies are more aggressive in terms of hedging
through derivatives in comparison to their smaller
counterpart. The data analysis in table-4shows that large
sized companies in the sale group of ₹500 billion are
highest percentage (86.36%) of derivative users
whereas it is lowest in small sized companies.
Table-5
Year-end Exposure (Risk-wise)
Ye
ar
Total
Curren
cy
Interest
Rate
Comm
odity
20
14-
15
No. of Users 265 226 90 19
Year-end
Exposure (ìn
Cr.)
63895
7.89
46987
2.8146
154732.
6353
14352.
43676
% of Total
Exposure
100%
73.54
%
24.22% 2.25%
20
13-
14
No. of Users 252 217 90 16
Year-end
Exposure (ìn
Cr.)
54017
3.74
39501
0.631
132002.
8671
13160.
23756
% of Total
Exposure
100%
73.13
%
24.44% 2.44%
20
12-
13
No. of Users 247 206 85 15
Year-end
Exposure (ìn
Cr.)
51244
5.39
37527
8.721
125169.
1524
11997.
51831
% of Total
Exposure
100%
73.23
%
24.43% 2.34%
20
11-
12
No. of Users 244 201 81 13
Year-end
Exposure (ìn
Cr.)
49983
2.43
37001
0.118
119582.
7349
10239.
57824
% of Total
Exposure
100%
74.03
%
23.92% 2.05%
20
10-
11
No. of Users 231 195 80 13
Year-end
Exposure (ìn
Cr.)
46715
9.58
35525
3.863
102525.
8671
9379.8
4724
% of Total
Exposure
100%
76.05
%
21.95% 2.01%
Average Growth in
Amount of Derivative
Use
8.30% 7.44% 10.90% 11.2%
The table-5shows the incremental growth in the rate of
use of derivatives over a period of five years from 2010-
11 to 2014-15, where it is clearly evident that there is
significant average annual growth in the in all variety of
financial instruments taken in the study.
Table-6
Industry breakdown of currency, interest rate, and
commodity derivatives use-2014-15
Industry Currency
Interest
Rate
Commodity
Tota
l
Sam
ple
No.
of
User
s
Year
End
Open
Intere
st
(₹)
No
. of
Us
er
s
Year
End
Ope
n
Inte
rest
(₹)
No
. of
Us
er
s
Year
End
Open
Intere
st
(₹)
Automobi
les
31 20
26354.
00
5
291
9.90
1 67.90
Conglome
rate
13 10
33635.
20
4
175
1.10
0 0.00
Consume
r
Durables
17 11
1041.1
0
3
389.
90
1 116.20
Energy 44 23
14994
6.4
11
108
349.
7
8
11792.
70
FMCG 46 28
27382.
30
11
880
3.70
3 774.30
Fertilizer
s
15 10
8872.8
0
6
127
3.40
0 0.00
Health &
Pharma
25 11
16139.
92
6
249
8.13
0 0.00
Industrial
s
69 36
45380.
60
16
562
9.80
2 472.20

IT 26 20
10389
5.2
1
934.
09
0 0.00
Infra 53 12
5424.8
0
11
105
66.6
0
2 365.90
Entertain
ment
11 5
1294.7
0
3
232
0.90
0 0.00
Metals 23 11
26628.
90
3
210
0.30
2 762.90
Telecom 9 4
5315.0
0
4
547
7.96
0 0.00
Textiles 33 21
15301.
50
4
143
9.10
0 0.00
Transpor
t
18 4
3259.7
0
2
277.
60
0 0.00
Total 433 226
46987
2.1
90
154
732.
1
19
14352
.10
HYPOTHESIS TESTING
On the basis of collected from the annual reports,
it has been empirically tested to identify whether there
is substantial and significant positive change in the use
of financial derivatives. For that, independent sample t-
test has been used to contrast between the first year
(2010-11) and last year (2014-15) of the sampling
period. The test results given as follows:
Ha1: There is significant increase in use of financial
derivatives over the sampling period.
Table-7
T-test for Equality of Means
Levene's
Test for
Equality of
Variances
t-test for Equality of
Means
F Sig. t df
Sig. (2-
tailed)
Derivativ
es Values
Equal variances 12.267 .000
2.66
0
864 .003
Equal variances not
assumed
2.66
0
641.86
8
.001
Before applying the t-test, it has to be made sure
of the fact that whether the sample variances are equal
or not. The result of t-test shows that there is a
significant incremental difference (at α=5%) between
the means of outstanding amount of derivatives for the
sample year 2014-15 and 2010-11. The t-test provides
substantial evidence about the fact that degree of usage
of financial derivatives has increased over the years
which is consistent with our research hypotheses (Ha1).
CONCLUSION
After liberalisation, Indian economy is now open for the
world class competition. It forced the Indian corporate
sector not only compete with the foreign competitors
but also to adapt and enforce state of the art financial
management concepts to be more competitive. In this
back drop, financial derivative is an innovative financial
instrument used to deal with an array of business risk.
Our research is to know; how Indian firms are embracing
the derivative use in risk management purposes. The
result is quite encouraging. It happens to be the fact that
there is a statistically significant increase in the use of
derivatives over a period of five years and a substantial
proportion of companies are using financial derivatives
for risk management purposes. In the coming years,
India will be one of the prominent derivative transaction
destination of the world.
REFERENCES:
1. Adedeji, A., & Baker, R. (2002). Why firms in the UK
use interest rate derivatives. Managerial Finance,
28(11), 53-74.
2. Alkebäck, P. and Hagelin, N. (1999), Derivative Usage
by Nonfinancial Firms in Sweden with an
International Comparison. Journal of International
Financial Management & Accounting, 10: 105–120.
doi: 10.1111/1467-646X.00046
3. Allayannis G., Brown G.W. and Klaper L.F. 2001.
Exchange rate risk management: Evidencefrom
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risk management: A three-countrystudy. Managerial
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usage in risk management by U.S. andGerman non-
financial firms: A comparative survey. Working Paper
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impact of institutional differences on derivatives
usage: A comparative study of US and Dutch firms.
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BOOKS REFERRED:
1. Rustagi P.R, “Derivative and Risk Management”,
Taxmanns’, New Delhi
2. Gupta S.L, “Financial Derivatives”, PHI Learning
Private Limited, New Delhi
WEB SITES:
1. www.ssrn.com
2. www.bseindia.com
3. www.nseindia.com

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